By Joe Vladeck
The European Securities and Markets Authority (ESMA) has sharply
criticized credit ratings agencies for downgrading the sovereign debt of
European nations.
The effect of sovereign debt downgrades "can be
significant," said ESMA chief Steven Maijoor. Some observers have
suggested that the downgrades made
the ongoing European financial crisis worse than it otherwise would have
been. Among other critiques, ESMA suggested that the ratings agencies were
compromised by interest conflicts and did not act independently.
As Bloomberg's
Matt Levine points out, ESMA's criticism is puzzling. In the
private-sector, private bond issuers pay ratings agencies to issue ratings,
creating incentives for ratings agencies to give bonds high ratings (in the
hopes of securing more business in the future). But sovereign debt issuers
don't pay ratings agencies to issue bond ratings. ESMA contorts itself to
describe the conflict in different terms, but ends up with accusations that
are, in Levine's words, "pretty weird." While credit agencies have
rightfully taken a share of the blame for the global financial crisis, this
particular critique seems misplaced.
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